Monday, September 14, 2009

Restrictions on Federal Reserve Credit

Large money-center banks are heaviest users of the discount window since they incur reserve deficits most frequently. However, less than 10 percent of all institutions eligible regularly borrow from the Federal Reserve System, despite the fact that it often the cheapest source of reserves. In part, this is due to an uneasy feeling experienced by most bankers about being in debt to a government regulatory agency. then too, the Fed‘s own regulations discourage heavy and frequent use of the window. for example, Federal Reserve officials stress that borrowing is a "privilege, not a right" and that no depository institution should come to rely upon Federal Reserve Credit. Borrowing institution are required to alternate between the window and other money market sources, especially Federal funds.

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